Corporate Russia to plug the banking breach with bonds and equities

Russian companies are lining up to secure funding on the equities and bond markets in 2010. The enthusiasm is being driven in part by wariness about the domestic banking systems ability to provide funding.

Equity raisings by Russian companies could top $20 billion next year, according to Renaissance Capital President, Ruben Aganbegyan. The would see Russia return to the global equities spotlight in a way it last did with $36 billion worth of equity raising in 2007 and $20 billion in 2006, after placing about $1 billion this year and $6 billion in 2008 as the global financial crisis hit home.

Sometime soon the long awaited IPO of Russia's biggest aluminium producer, Rusal, is likely to raise $2 billion when it lists in Hong Kong. Others looking to follow in its wake include metals and mining players – MetalloInvest, Evraz, Mechel and Norilsk Nickel – fertilizer producer Eurochem, retailers X5 and Dixy, freight hauler Globaltrans, meat processor Cherkizovo group and drug distributor Protek.

Chief Economist at Merrill Lynch, Yulia Tseplyaeva, believes it is likely that many Russian companies will move quickly to take advantage of a global environment rapidly turning in their favour.

“In some sectors, particularly metals, machinery, chemistry, where demand for investment is particularly high, we may see the IPO of Russian companies. So I would say, taking into account that the global environment for IPO’s is becoming more and more favourable for Russian companies, I believe that we will see a lot of them in 2010.”

But other companies are turning to bond markets for their liquidity. It has remained more vibrant through the credit crunch and economic downturn

Russian diamond monopoly said on Wednesday it may look to place as much as $1 billion in debt in late 2010, following in the wake of recent placements by MTS and Acron. The announcement came amidst signs the bond market is stirring with FitchRatings recently tipping renewed debt activity in the coming year, and giants Sistema, Russian railways and NLMK lining up the debt market.

Ekaterina Trofimova, Banking Director at S&P believes the turn to the markets reflects a lack of capacity in the banking system.

“Even if we see some appetite for lending coming back, especially at the level of some institutions, generally speaking, especially if we think of some big ticket transactions, the banking system still doesn’t have sufficient capacity to match fund needs of the real sector of the economy. The interest to foreign lenders, international banks, is still quite selective, usually focusing on the most credit worthy institutions with the highest ratings.”

That underlines the concerns of Finance Minister Alexei Kudrin when he spoke of Russia’s credit market being the ‘weak link’ on Tuesday and warning of the implications for the Russian economic recovery of any rise in global interest rates and subsequent capital outflow from Russia. If the banking system isn’t capable of funding corporate Russia, then the action in the equities and bond markets in coming months could surprise to the upside as companies look to get cash on their balance sheets while it is available.